Annual Percentage Yield (APY)
Annual percentage yield (APY) is a normalized representation of an interest rate, established on a compounding period of one year. APY figures permits for a reasonable, single point equivalence of various offerings with varying compounding schedules. All the same, it does not account for the possibility of account fees affecting the net gain. APY by and large refers to the rate compensated to a depositor by a financial institution, while the correspondent annual percentage rate (APR) refers to the rate compensated to a financial institution by a borrower.
The APY commences with the annual percentage rate (APR), and then takes compounding into account. It will tell investor how much interest a deposit will actually earn in a year or how much interest investor will actually compensate on a loan, such as a credit card. It is established on the rate of interest investor being compensated (the APR) and how frequently investor are compensated that interest yearly, monthly and daily.
Calculating Annual Percentage Yield
To compute APY, investor require to know two things: the APR and how frequently the interest is compounded. The first step is to determine the periodic rate, which is a fancy way of stating interest compensated every so frequently in the period. This is the APR divided by the number of compounding periods in a year. If the interest is compounded monthly, divide by 12, if it is weekly, divide by 52, and so on. Then investor then add 1 to the periodic rate in its decimal form and multiply that number by itself adequate times to get a whole year. For compounding every quarter, multiply it 4 times. This could be conveyed employing power notation, too. To summarize:
APY = (1 + periodic_rate)^(No. of periods) - 1
To make the most from the money, investor want to get the highest APY possible, so shop around and compare yields, acquiring into account the interest percentage and how frequently it is combined. A more frequent compounding should earn investor more interest in a year. Comparing just annual percentage rates (APRs) won't give investor the full picture.
On the flip side, investor want to have as little compounding as possible on loans. But, in various cases, investor are stuck with what investor could get, such as the daily compounding that credit card companies do on the average outstanding balance and then try to employ it as inspiration to keep that balance as low as possible Most preferably $0, which means investor compensate the credit cards off every month.
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